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Restricting Corporate Authority to File Bankruptcy

A dramatic recreation of the fight over corporate authority to file bankruptcy.

The Fifth Circuit recently issued an opinion that federal bankruptcy law does not prohibit a bona fide shareholder from exercising its right to vote against a bankruptcy filing notwithstanding that such shareholder was also an unsecured creditor. This represents the latest successful attempt to preclude bankruptcy through golden shares or bankruptcy blocking provisions in corporate authority documents.

In this post on the Bankruptcy Cave, Bryan Cave Leighton Paisner attorney, Jay Krystinik, analyzes how the Fifth Circuit Affirms Dismissal of Bankruptcy Case Due to Lack of Corporate Authority to File (and potentially provides a blueprint for veto powers over bankruptcy filings).

“There is no prohibition in federal bankruptcy law against granting a preferred shareholder the right to prevent a voluntary bankruptcy filing just because the shareholder also happens to be an unsecured creditor by virtue of an unpaid consulting bill. . . . In sum, there is no compelling federal law rationale for depriving a bona fide equity holder of its voting rights just because it is also a creditor of the corporation.”

The Fifth Circuit was careful to limit its holding to the facts of this case. “A different result might be warranted if a creditor with no stake in the company held the right. So too might a different result be warranted if there were evidence that a creditor took an equity stake simply as a ruse to guarantee a debt. We leave those questions for another day.”

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Negotiability of HELOC Notes under Florida Law

In Third Fed. Sav. & Loan Ass’n of Cleveland v. Koulouvaris, No. 2D17-773, 2018 WL 2271112 (Fla. 2d DCA 2018), Florida’s Second District Court of appeal analyzed, in the context of trial exhibit authentication, whether the note for a home equity line of credit (“HELOC”) was negotiable.

The Second District Court of Appeal considered whether it was proper for the Pasco County, Florida trial court to involuntarily dismiss Third Federal’s claim for foreclosure of a HELOC mortgage based on an objection that the HELOC note was nonnegotiable.  At trial, Third Federal attempted to admit the note as self-authenticating, endorsed commercial paper.  The borrowers countered that because the HELOC note was nonnegotiable, self-authentication did not apply.  Because Third Federal made no further effort to authenticate, the trial court sustained the borrowers’ objection, and the borrowers’ subsequent motion to dismiss was granted.  Third Federal appealed.

The Second District Court of Appeal sided with the borrowers.  It noted that self-authenticating commercial paper is an exception to Florida’s requirement that a document be authenticated prior to its admission into evidence.  That rule, however, does not apply where the paper is not an unconditional promise to pay a fixed amount of money.  By its own terms, the subject HELOC note only established an obligation for the borrowers to repay whatever they might borrow, without any guarantee that they would ever borrow a single dollar.  Thus, the note’s failure to require payment of a fixed amount meant the note was nonnegotiable and, as such, was not self-authenticating.  Without proof of authentication, the note was inadmissible, and the trial court’s decision to grant the borrowers’ motion to dismiss was proper.

Although it is fairly obvious, the negotiability attributes of a HELOC are similar to a home equity conversion mortgage (“HECM”) and thus this case would likely apply to reverse mortgages too.  It is expected that borrower’s counsel will cite the decision for this purpose.  Accordingly, it is recommended that trial counsel in both HELOC and HECM matters be prepared to not rely on an endorsement of the note for authenticity, but rather should elicit live testimony supported by admissible documentary evidence that the note was assigned.  A prepared witness should be able to authenticate a HELOC or HECM note.

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Reverse Mortgage Update: New York Law Mandates New Foreclosure Notices and Certificate of Merit

New York has signed into law an amendment redefining a reverse mortgage as a “home loan.” With this amendment, statutory pre-foreclosure ninety day notices (RPAPL 1304) and a “certificate of merit” (CPLR 3012-b) will be required in all New York reverse mortgage foreclosures. Additionally, New York’s foreclosure settlement conference law (CPLR 3408) now incorporates by reference the new “home loan” definition.

The legislation was signed by Gov. Andrew Cuomo on April 12, 2018 but “shall be deemed to have been in full force and effect on and after April 20, 2017.” However, the pre-foreclosure notice requirement specific to reverse mortgages has an effective date of May 12, 2018.

Under the new legislation, for actions commenced after May 12, 2018, lenders, assignees or servicers are required to provide a pre-foreclosure notice at least 90 days before commencing legal action against the borrower or borrowers at the property address and any other addresses of record. The language of the notice is set by statute.

Although the 90-day waiting period does not apply, or ceases to apply under certain circumstances (i.e. where a borrower no longer occupies the residence as a principal dwelling),the 90 Day Notice is a condition precedent which, if not strictly complied with, may subject a foreclosure action to dismissal. Further, the foreclosing party is required by statute to deliver the notices by first class and certified mail. Relevant case law makes clear that evidencing the proof of mailing may require tracking documentation for first class mail and certified receipts for notices sent by certified mail.

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D.C. Circuit Rejects FCC’s TCPA Interpretation

On March 16, 2018, the D.C. Circuit issued its long-awaited opinion on the FCC’s 2015 Declaratory Ruling and Order (“2015 Order”) interpreting various sections of the Telephone Consumer Collection Practices Act (“TCPA”)[1]. Of note, the Court specifically rejected and set aside the FCC’s interpretation of what constitutes an Automatic Telephone Dialing System (“ATDS”). The Court also rejected the FCC’s one-call “safe harbor” for re-assigned phone numbers. At first glance, this may seem like a win for those defending TCPA lawsuits; however, the opinion may create more questions than answers.

The Court addressed (i) what types of automatic dialing equipment fall under the TCPA’s definition of ATDS; (ii) whether a dialer violates the TCPA if a number is reassigned to another person who has not given consent to be called; (iii) how a consenting party may revoke consent; and (iv) whether the consent exemption for healthcare-related calls was too narrow. The Court’s scope was limited to whether these aspects of the FCC’s 2015 Order were “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). The Court upheld the FCC’s “approach to revocation of consent, under which a party may revoke her consent through any reasonable means” and rejected the one-call “safe harbor” for re-assigned phone numbers as “arbitrary and capricious.”

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Modifications to the California Homeowner Bill of Rights

On January 1, 2018, certain provisions of the California Homeowner Bill of Rights (“HBOR”) expired.  But contrary to what many assumed, the January 1, 2018 expiration date did not apply to all of the HBOR’s provisions, and many provisions have been replaced by new regulations.  We’ve prepared the below summary of some of the substantial changes to the law and how they will affect HBOR litigation in the future.

  • The new HBOR removes many of the distinctions between servicers conducting more/less than 175 annual foreclosures.  In most but not all respects, all servicers are treated the same going forward.
  • Changes in the private right of action/relief.
    • The HBOR still has a private cause of action, but only for material violations of section 2923.5 (pre-NOD notice requirements), 2923.7 (single point of contact), 2924.11 (dual tracking), and 2924.17 (accuracy of NOD declaration; substantiate right to foreclose).
    • Injunctive relief is available prior to the recording of a trustee’s deed.  After a trustee’s deed is recorded, a servicer may be liable for actual economic damage and the greater of treble or actual damages for material violations that are intentional or reckless.  Attorney’s fees are still available if the borrower prevails.
    • However, mortgage servicers who have engaged in “multiple and repeated uncorrected violations” of section 2924.17 are no longer liable for a $7,500 penalty.
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ICBA Negotiates Settlement with Plaintiff Group on Alleged ADA Liability

Numerous community banks that had received demand letters from the advocacy group Access Now alleging that their websites and mobile apps are inaccessible in violation of Title III of the Americans With Disabilities Act (the “ADA”) have now also received letters that those claims have been resolved under a settlement with the Independent Community Bankers of America (ICBA).

The settlement releases ICBA members and non-member banks with assets of $50 billion or less from all ADA claims concerning their electronic banking services, including online banking, mobile banking, ATM services, and telephone banking.  The settlement resolves numerous claims that Access Now had made through its counsel, Carlson Lynch Sweet Kilpela and KamberLaw LLC.  ICBA announced the news of the settlement directly to its members in November.

The settlement preceded an announcement by the U.S. Department of Justice (“DOJ”) that it is withdrawing all rulemaking concerning website accessibility under the ADA.  The DOJ first announced its intent to promulgate such regulations in 2010.  Its announcement leaves uncertain the issue of whether, and when, there will be a government standard for website accessibility.

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Courts Continue to Weigh in on the Issue of Website Accessibility

Courts across the country continue to weigh in on the issue of website accessibility. Earlier this month, the U.S. District Court for the District of New Hampshire denied a Motion to Dismiss filed by online food delivery servicer Blue Apron. In denying the motion, the court found that Blue Apron’s website is a place of public accommodation – despite the fact that Blue Apron operates only online and has no traditional brick and mortar locations. Access Now, Inc. v. Blue Apron, LLC, Case No. 17-cv-00116, Dkt. No. 46 (D. N.H. Nov. 8, 2017). In so finding, the court relied on binding precedent in the First Circuit, and noted that other Courts of Appeals, namely the Third, Fifth, Sixth and Ninth Circuits, have held that in order to be considered a “public accommodation,” an online business must have a nexus to an actual, physical space. Id. at pp. 9-10. This decision highlights that the issue of website accessibility, especially as it applies to online only businesses, remains a contested issue.

The New Hampshire federal court also found that despite the lack of regulations from the Department of Justice (“DOJ”), “Blue Apron must still comply with Title III’s more general prohibition on disability-based discrimination….” Id. at pp. 14-15. The court noted that there might have been a due process violation if plaintiffs had “attempt[ed] to hold Blue Apron liable for failure to comply with independent accessibility standards not promulgated by the DOJ, such as the WCAG 2.0 AA standards….” Id. at p. 20. This was not a concern, however, because plaintiffs relied on Title III of the ADA as governing potential liability and only invoked compliance with WCAG 2.0 AA standards as a “sufficient” but not “necessary” condition. Id. at p. 21.

The Court also took up the issue of primary jurisdiction and held that because “the potential for delay” was “great,” it would not invoke the primary jurisdiction doctrine and dismiss or stay the matter until DOJ issues regulations concerning website accessibility. This holding is in direct contrast to the holding in Robles v. Dominos Pizza, LLC, where the United States District Court for the Northern District of California held that it would violate Domino’s due process rights to find that its website violates the ADA because the DOJ still has not promulgated regulations defining website accessibility. See Robles v. Dominos Pizza LLC, No. 16-cv-06599, Dkt. No. 42 (N.D. Cal. Mar. 20, 2017). Further analysis regarding the Robles case can be found in this blog post.

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The Magic of Mt. Gox

The Magic of Mt. Gox

November 27, 2017

Authored by: Bryce Suzuki and Justin Sabin

How Bitcoin Is Confounding Insolvency Law

Arthur C. Clarke famously observed: “Any sufficiently advanced technology is indistinguishable from magic.” Our regulatory, legislative, and judicial systems illustrate this principle whenever new technology exceeds the limits of our existing legal framework and collective legal imagination.  Cryptocurrency, such as bitcoin, has proven particularly “magical” in the existing framework of bankruptcy law, which has not yet determined quite what bitcoin is—a currency, an intangible asset, a commodity contract, or something else entirely.

The answer to that question matters, because capturing the value of highly-volatile cryptocurrency often determines winners and losers in bankruptcy cases where cryptocurrency is a significant asset. The recently-publicized revelation that the bankruptcy trustee of failed bitcoin exchange Mt. Gox is holding more than $1.9 billion worth of previously lost or stolen bitcoins highlights the issue.

The Mt. Gox Case:  Timing is Everything

In 2013, Mt. Gox[1] was the world’s largest bitcoin exchange.  By some estimates, it accounted for more than 80% of all bitcoin exchange activity.  By February 2014, Mt. Gox had shut down its website, frozen customer accounts, and ceased trading.  A leaked internal document indicated that hackers had gained access to Mt. Gox’s online wallets and stolen nearly 850,000 bitcoins, each then worth approximately $550.  That same month, Mt. Gox commenced insolvency proceedings in Japan, and thereafter filed a corresponding chapter 15 bankruptcy in the United States.  Mt. Gox eventually “found” approximately 200,000 bitcoins previously believed to be among those lost or stolen.

When it became clear that Mt. Gox could not reorganize and would proceed with liquidation, the Japanese court appointed a trustee over Mt. Gox’s assets.  A former Mt. Gox exchange customer then filed a lawsuit against the trustee seeking the return of the customer’s purchased bitcoins.  The Japanese court, however, ruled that the bitcoins at issue were not capable of ownership under Japanese law and dismissed the lawsuit.  Article 85 of the Civil Code of Japan provides that an object of ownership must be a tangible “thing,” in contrast to intangible rights (like contract or tort claims) or natural forces (like sunlight or electricity).  Bitcoin, the court ruled, does not meet the definition of a “thing” under the statute and, therefore, does not qualify for private ownership.

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No Fiduciary Duty Between Lead and Participants

A recent decision out of federal court arising out of litigation involving a Ponzi scheme has reinforced the principle that the lead in a loan participation does not owe a fiduciary duty to participants.  The case of Finn v. Moyes (Finn v. Moyes,  2017 WL 1194192 (D Minn 2017)) arose from a Ponzi scheme whereby First United Funding, LLC (“First United”) defrauded numerous banks of over $90 million.  A receiver was appointed to recover funds and sued a number of parties for, among other things, aiding and abetting the fraud carried on by First United.

The receiver claimed that one group of defendants (the “Moyes”) had actual knowledge of the fraudulent conduct and aided and abetted First United by fraudulently over-pledging collateral. The Receiver also alleged that the most of the other loans made by First United were to parties that the Moyes had introduced to First United.

Moyes moved for summary judgment on the Receiver’s aiding and abetting claim. The court noted that under Minnesota law to prove its claim the Receiver would need to show: (1) First United committed a tort that caused an injury to the participant banks; (2) Moyes knew that First United’s conduct constituted a breach of duty; and (3) Moyes substantially assisted or encouraged First United in the achievement of the breach.

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Bank Website ADA Litigation

Although the frequency of bank clients receiving demand letters related to violations of the Americans with Disabilities Act (“ADA”)  based on website (in)accessibility seems to be declining, Bryan Cave lawyers around the country continue to be actively involved in defending such claims in other industries.  In addition to working with the Georgia Bankers Association and the California Bankers Association, Bryan Cave has published updates through a number of blogs that may be of value to our banking clients.

In April, Start Up Bryan Cave, our blog focusing on start ups of all kinds, published “Best Practices for your Corporate Website: How to Avoid an ADA Claim.”

Making your company’s website ADA compliant now, before your company is a target of a lawsuit or a demand letter, makes good business sense.  It will open your company up to more potential customers, limit your liability, position you to deal effectively with the regulatory challenges of growth, improve your company’s reputation in the marketplace and is simply the right thing to do.  Also, being proactive in establishing compliance protocols for your growing company will cause you to stand out among your competitors, make you more attractive to potential investors and partners, and can greatly mitigate any regulatory actions if a regulatory agency decides to audit your business.

In June, BC Retail Law, our blog focusing on clients in the retail sector, published “Retailer Loses ADA Website Accessibility Trial” about the first ADA accessibility litigation to go to trial.  The Court held that Winn-Dixie violated Title III of the ADA because its website was inaccessible to the visually impaired plaintiff.

[D]espite the fact that Winn-Dixie does not conduct sales through its website, the Court found that the website was “heavily integrated” with the physical store locations because customers can use the website to access digital coupons, find store locations, and refill prescriptions through the website.

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